I decided to dust off my keyboard today and talk just a little bit about why this blog and my opinions on life insurance underwriting have hit home, struck deep, rang the bell and put life insurance back on the table for so many who are able to translate and follow my rants and meanderings. Life insurance can be one of the easiest contract transactions you’ll ever participate in or it can turn into one of those experiences that raise your blood pressure every time you talk or even think about it.
Let’s just start with the guts of the whole life insurance idea, the mortality or actuarial risk. The company looks over all of the information they have gathered on you and they decide if you fit into their preferred plus (best rate class) or, for instance, their preferred (second best rate class). It doesn’t sound like that big of a deal when you say best rate or second best rate, but just keep in mind for a minute that, on average, the difference in cost between those two level is about 30%. In the real world if one life insurance policy costs you, the customer, 30% more than an identical life insurance policy, logic would say that the company must perceive a 30% higher risk with you over someone who gets their best rate.
But a real life example kind of makes me know for a fact that it doesn’t take 30% more risk to cost you 30% more for your life insurance. Most people are familiar with cholesterol and HDL (good cholesterol) and the cholesterol ratio where you divide the first one by the second one. For instance, if you have a total cholesterol of 200 and HDL of 50 you would have a ratio of 4.0. The cutoff for the best rate class for a lot of companies is 5.0 (200 total and HDL 40). So what happens if your ratio is 5.1? (200 total and HDL 39.2) In the real life insurance world the company approves the policy at their second best rate and adds 30% to the cost. It’s what their guidelines say to do.
But the real frustration for life insurance customers, agents and the better underwriters is that we all know there isn’t a 30% increase in mortality risk. This is an “OH so sweet spot” for life insurance companies because they know there is no discernible difference in mortality but they get to charge as if there is. Their argument is that they have to draw a line somewhere and if they allow movement for their best rate, where will their argument be 3 or 4 rate classes deep?
Bottom line. Plenty of companies have figured this challenge out by crediting and debiting healthy points for things like exercise, being a non smoker, good family history, etc. If you have questions about how you can fix just barely missing a rate class, call or email me directly. My name is Ed Hinerman. Let’s talk.